Low-brow long term approach?

[Newroad]

Hi All.

This post/topic is more of a sanity check - hoping to make sure what I'm doing is not off the wall.

In short, I'm looking for a low maintenance/activity long term approach - not too many (investment trust) holdings to manage - adequate diversification given (a) by virtue of being investment trusts, and (b) at a family level (e.g. we can support each other if needed, if one investment doesn't do as well as another).

Basic situation: me early fifties, wife late forties, both still working with decent jobs, kids born a year or two either side of the 2008 GFC (this becomes relevant - see later). House and car paid off etc.

Kids have had all government issued money (e.g. child benefit, whilst we were still entitled to it) and grand-parental top ups from one side invested in FCIT from birth via a Child Trust Fund (now switched to Junior ISA) - grand-parental top ups from the other side in MYI (the only poorer performer really - but compared to other investments I could have made, still decent). These have gone rather well - rode the recovery up - comfortably over £100K in total.

So, here's the very basic "lifestyle" plan ...

Kids until through university (or similar): 2/3 in global investment trust, 1/3 in global bond investment trust - after that, switch them to 1/2 and 1/2 as per line below and hand over to them to do with as needed
Wife and I: 1/2 in global investment trusts (both ISA and SIPP), 1/2 in global bond investment trusts - most new additions going to the ISA
Wife and I once retired: 1/3 in global investment trusts, 2/3 in global bond investment trusts - use (in order, if and as needed) work pensions, ISA draw down, SIPP draw down

The specific current and also proposed long term holdings are ...

Kids Junior ISAs

2/3 FCIT
1/3 CMHY

Kids "other" (relative size - 20% of Junior ISA's)

3/3 MYI

Wife and I ISAs

1/2 WTAN
1/2 HDIV

Wife and I SIPPs

1/2 ATST
1/2 IPE

I am aware of the following

That the bond investment trusts listed all have significant high yield components, so are likely to be somewhat correlated with equities
That CMHY and IPE have the same/similar managers and hence similar holdings
That MYI is Equity Income (works better that way - less need to add a bond investment trust to that account, which would be difficult for logistical reasons which don't bear going in to)

I don't have any particular income target in retirement - I don't expect to be rich and don't expect to be poor - and we will likely make whatever the investment returns give work. I would prefer to put in only modest maintenance effort compared to what I understand many of you might do - knowing this may or may not lead to a less optimal outcome.

So, the acid question - is continuing to invest as above, in the same proportions, varying per life phase as indicated - a reasonable though perhaps not optimal, low maintenance approach?

All constructive feedback, even if critical, would be appreciated

Regards, Newroad

[scotia]

Unless you are planning to retire early, it looks like you still have a long time horizon without requiring to draw from your investments. So why bother about bonds at this stage? And if you accumulate a comfortably large amount by retirement age, I would still be light on bonds (as I am). However if in retirement you expect to be heavily dependent on these investments, then, traditionally, you probably would be advised to move into a substantial fraction of bonds as you approach retirement. I should stress that a light-on-bonds policy is simply my view which has worked well for me over the past 20 years. However future conditions may be quite unlike past conditions.
And, as an aside, if you really want to adopt a hands-off approach, instead of using a mix of ITs, you may want to think about a Global Equity Tracker ETF - E.G. Vanguard All World (VWRL). Over the past 5 years, on a total return basis, It may not have done as well as Foreign & Colonial (FCIT) or Alliance Trust (ATST), but it has out-performed Witan (WTAN) and easily out-performed Murray International Trust (MYI), Henderson DIV (HDIV), City Merchant (CMHY) and Invesco EN (IPE).
Of course, it does not give you a bond coverage. Interestingly, looking at VWRL over the past 5 years, it, and FCIT, are the only two of the above showing no negative yearly returns. Of your Bond/Income investments, HDIV has shown poor performance during market downturns - a loss of 10% in 17/18. So are bonds really the answer in a Bear Market? And as you already know, MYI has been a serial offender with substantial losses in 14/15 and 17/18. However hindsight is wonderful - who knows what the future holds.

[StOmer]

Hi Newroad.
If you are sticking with IT's then for the children I would consider moving their bond element into something such as Scottish Mortgage or if too risky then 100% into something such as Foreign & Colonial, Mid Wynd or Martin Currie Global. For the adults, I would reduce the bond exposure to no more than 35% but preferably 20%. I would also plan on staying with 80/20 or 65/35 equity/bond split when in retirement.

Best wishes,
Mickey

[Newroad]

Thanks both for the replies.

To address, though perhaps not fully answer, your comments points etc ...

No plan to retire particularly early, though my wife would like to retire as early as practical - I'm more sanguine for myself
You both mention lightening the bond weightings. That is certainly how I have been in the past (completely equities). However, two things currently suggest more discretion to me - the equity bull run may not have that much more steam and received wisdom, in general, is to reduce equities and increase bond weighting as life goes on
I'm not a big fan of the idea of ETF's - they seem to have both more counterparty and execution risk than Investment Trusts. However, perhaps I should look at one or more fixed income ones in lieu of HDIV, IPE and/or CMHY to reduce equity correlation further
Are bonds the answer in a bear market - perhaps not - the consideration may be though as to whether they are as much the question! However, maybe my approach is neither fish nor fowl in this respect - see comment above about ETF's

The tenor of your replies suggest I'm not completely off the wall - which is a good thing

Regards, Newroad

[Backache]

If you're wanting to go for a bond equity split shy not use one of the Vangard Life strategy unit trusts , a lot less clunky than using different bond trusts and IT's

[vrdiver]

... received wisdom, in general, is to reduce equities and increase bond weighting as life goes on

My understanding of that pearl of wisdom was that its purpose was to reduce volatility as you approached the point where you would swap your pension fund for an annuity.

If that is still your plan, then fair enough, but if you propose to run your investments through retitirement, however hands-off simplistic an approach you choose, then significant bond holdings may well have a drag on your long-term wealth. There is an argument for having bonds and rebalancing your portfolio based on whether the equity or bond element has outperformed, but for a very hands-off approach that may not be a great strategy (i.e. needing to choose bonds or bond ITs that don't correlate with equities, choosing when/how/if to rebalance, incurring costs etc.)

Ultimately, so long as you can sleep well, rather than worry about what your investments will do as each economic or political crisis staggers into view*, maximising your return is probably only one factor to consider. Safety and peace of mind are also worthy objectives.

VRD

*Not that we have any economic or political crises staggering about at the moment of course...

[Newroad]

Hi Backache.

Thanks for asking.

In short, the same reason as for ETF's but magnified - counterparty risk and execution risk. I realise that Vanguard are a big and fairly sensible player. so that counterparty risk is probably not significant. However execution risk (both in terms of either mirroring/holding the underlying and in being able to get out when needed) is.

[vrdiver] Noted and understood. Interestingly, one of my reasons for putting some of the kids into bonds was that they might need to draw down on a portion of it sooner to pay for university or similar. Should this eventuate, I'm hoping that the bond holdings would be less exposed to a correction and might form that draw down - with the equity component being held on to for as long as needed.

But, I could be wrong of course - and as you say, what crises

Regards, Newroad

[Backache]

Hi Backache.

Thanks for asking.

In short, the same reason as for ETF's but magnified - counterparty risk and execution risk. I realise that Vanguard are a big and fairly sensible player. so that counterparty risk is probably not significant. However execution risk (both in terms of either mirroring/holding the underlying and in being able to get out when needed) is.

Regards, Newroad

I'm not quite sure what execution risk you are referring to? I would have though fluctuating discounts and bid offer spreads in IT's lead to a greater execution risk than Vanguard funds, the underlying holdings are very liquid of themselves.

[Newroad]

Hi Backache.

I'm not sure if Vanguard have ever gated any of their funds/ETF's or made exiting structurally less attractive for a period - but I'm fairly sure they could - and probably would in a time of market turmoil. Further, I haven't looked at how they run their ETF's in terms of mirroring the underlying, but once again, there is a risk they choose not to (for commercial reasons) or make a mistake and don't do so accurately.

The thing about Investment Trusts (though, I suppose, some can and do use derivatives and similar) is that they don't get gated, they in general hold the underlying, any increases in the spread (and discount's to NAV) are market determined and said market will, in general, remain open.

I hope it's clear that I'm claiming no expertise ETF's - this is more about Investment Trusts being the purer market form of this type of investment - and fewer non-market moving parts reduces Execution Risk IMO.

Regards, Newroad

[scotia]

I find bonds a bit puzzling in the current economic circumstances. In all of the major developed economies interest rates are very low. Consequently high quality bonds have a very low return. To get a higher return, you need to accept a higher risk, and you are into the junk bond area, which frankly seem much more likely to be problematic than high quality equity if the world economy goes into a downward spiral. OK - so you could stick to high quality bonds, with a low return. But there is substantial risk of down side if world interest rates start to rise - then existing bond prices will fall. And I can't really see world interest rates falling much further - so I can't see existing high quality bond prices rising. This looks like more downside than upside. The only scenario I can see where bonds could triumph would be if there was a sudden significant drop in equity prices, with no signs of recovery.
However I should stress that the above may be a naïve appreciation of the virtues of bonds, and I am open to re-education if others have contradictory views

[johnhemming]

I tend to agree. Unless regulators require investment in bonds there is to some extent a guaranteed loss in many in real terms. Preference shares are trading moreso around the 5% level, but equity yields can be quite similar.

[scrumpyjack]

Everyone has to invest on whatever basis they are comfortable with. As my investment experience developed in the 70’s with inflation hitting 27% at one point, I regard inflation as a very big long term risk, particularly in this country and especially if we get a Labour government. We might escape it this time but there is a significant risk next time that we won’t.

Early fifties late forties, you could have over 40 years to go and you will be earning for say another 15 years?

Personally I wouldn’t touch bonds in that scenario as you are virtually guaranteed a real terms loss, unless perhaps you invest in US Inflation linked bonds. Even with those you could pay CGT on the inflation linking unless in tax sheltered account (SIPP). UK ILG’s are so overpriced you are guaranteed a loss.

I would go for international investment trusts or perhaps VWRL ETF. I would want as much as possible of my investments not to be exposed to the UK.

[Newroad]

Hi All.

Thanks for the later replies. On the basis of all replies, I am minded to slightly de-weight bond investment trusts - exact final levels to be decided. In some respects, this was not a hard sell - I have always been an equity man at heart.

I suspect - but I suppose this is a truism - that in the end, whether I'm in general doing the right thing will depend on some combination of the stock market overall on various time frames, the relative correlation between equities and (mainly high yield) bonds in the case of a correction and how well the investment trust managers bond pick.

As an aside on a topic that came up above, here* is a view from the FT re the relative safety of ETF's: Some may find it of interest.

Regards, Newroad

* apparently I'm not approved to post links - so please look it up for yourself if interested - you'll need to manipulate the URL below or search for it on the FT site. It's title is "Bond ETFs are no menace to the financial system"

ft.com/content/82355694-0fd5-11ea-a225-db2f231cfeae

[richfool]

Newroad, I think this is the link you couldn't post, but it is behind a paywall, unless one is already a subscriber:

https://www.ft.com/content/82355694-0fd ... 2f231cfeae

[PinkDalek]

Newroad posted the title Bond ETFs are no menace to the financial system, which enables non-subscribers to find the full article via their favourite search engine.

[hiriskpaul]

Newroad, I just read through this thread and can see that you are under the impression that ETFs have more counterparty risk than ITs. I suspect that you picked this up from an article or two discussing risks associated with swap based ETFs. These type of ETFs do indeed have counterparty risk, but there are not many ETFs like that around anymore. Investors do not like them and they have been in rapid decline since the GFC. Most tracker ETFs these days use physical replication, investing in every stock in the index, or in some instances by sampling a sub-set. It tended to be the banks that went in for swap based ETFs as they have expertise and the systems to handle swaps, but even they have largely moved away from swap based ETFs. Vanguard have only ever used physical replication and iShares the same, although iShares may have a few swap based ETFs in very specialist areas.

If you want a low brow strategy as you put it, it does not come much simpler than a global tracker, ETF or OEIC/UT. You eliminate the fund manager risk to your returns and the temptation to flip into what you see as better performing ITs than the ones you currently hold, which may do more harm than good over the long term. A global ETF/OEIC will give you global market returns at very low cost and that is it. This does mean that you miss out on the opportunity to get better returns, but you eliminate the risk of holding a load of duds.

It is best not to get into thinking that bond ITs are a substitute for a low volatile bond portfolio. They tend to invest in much higher risk securities/loans, can use gearing and are subject to a varying discount to NAV, just like other ITs. These ITs may add diversification to your risk portfolio, but they fail when you need diversification the most, such as during the GFC.

If you want a very simple, but equity/risk heavy, portfolio, you might want to look at the Warrent Buffett retirement portfolio (https://www.investopedia.com/articles/p ... -sound.asp, or here for a more detailed analysis https://pdfs.semanticscholar.org/f996/6 ... aff2be.pdf). WB proposed 90% in a S&P 500 index fund and 10% in short dated US government bonds. For UK retail investors, substitute FSCS protected cash deposits for the bond component and perhaps a world tracker in place of the S&P 500 fund.

If drawing down from the WB portfolio, you would spend from the cash pot, then rebalance back to 90:10 once per year. In practice it might work like this for an initial £1m portfolio:

Initially invest £900k into the tracker fund(s)/ETF,(s) £100k in deposit accounts. Direct all dividends into the cash account. Spend 40k from the cash/deposit account during the year. Assuming 20k dividends and interest during the year, implies 80k cash at year end. To be in 90:10 balance, that implies a stock component of 720k. If worth less than 720k, do nothing. If worth more than 720k, sell* sufficient stock to get you back to 90:10 weights. That should ensure that most of the time you are not selling shares after a year in which share prices fell.

* Set a tolerance on this, so you don't sell less than say £2k of stock.

[stevensfo]

The subject of ETFs being risky makes me laugh, only because I discovered them before ITs. Before the Financial Crisis, I was a very naive (and still am) investor putting a bit by each month into a Halifax Sharebuilder account and a Cash ISA.

A lot of reading and research, and I was diversifying at the speed of light, and started ssISAs. The choice of ETFs was colossal and they have been absolutely amazing. Years later, I read about ITs and was suspicious. Why the higher charges etc? Nevertheless, I now have quite a mixture, probably far more diversification than I need, but it's doing the job really well.

Steve

[Newroad]

Hi All.

For the avoidance of doubt, I was indeed expressing concern earlier about ETF's - and do retain some.

However, when I posted the FT article (sort of), I was showing a/the counter view. It's always helpful to consider the other side, IMO.

Then there is the bigger question as to whether having so much money sloshing around in passive funds is good for price discovery - but perhaps that is a topic for another thread.

Regards, Newroad